Refund Claims and Section 7508A

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Bob Probasco, a regular guest poster, has joined Procedurally Taxing as a contributor. In today’s post, Bob unravels the intersection of the suspension rules of Section 7508A and the refund lookback limits in Section 6511. Les

In normal years, the President may make multiple regional disaster declarations; in 2020, we had a nationwide disaster declaration related to the COVID pandemic.  Our work environments and financial security were affected dramatically, as were IRS operations.  The IRS generally provides taxpayers broad-based relief under section 7508A after such disaster declarations.  That has resulted in more than a few PT blog posts on the complexities of those provisions (see herehere,herehere, and here for just the tip of the iceberg; you can find several more if you go to the top of the blog webpage and type “7508A” or “7508A(d)” into the Search box).  

The National Taxpayer Advocate submitted her 2021 Annual Report on January 12, 2022.  As Les noted, it really is required reading for those interested in tax administration.  Alas, I’ve fallen behind in my reading, but someone brought one particular legislative recommendation in the 2022 Purple Book to my attention.  The #10 legislative recommendation (starting at page 30) proposes an amendment to avoid problems arising from the interaction between section 7508A and refund claims.

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The problem and the proposed fix

As we all remember, there are two different statutes of limitations with respect to refund claims in section 6511.  Section 6511(a) describes how soon a refund claim must be filed – three years after the return was filed.  (If the refund claim is not filed by then, it will still be timely if paid within two years of a payment by the taxpayer.  That option is not relevant to this discussion.)  That deadline is clearly one that the IRS has discretion to suspend.   § 301.7508A-1(c)(1)(iv).  For the pandemic, the IRS exercised that discretion in Notice 2020-23.

But there is the second limitation.  Section 6511(b)(2) limits how much the taxpayer can recover, even from a timely filed refund claim.  When the claim is timely filed within three years after the return was filed section 6511(a), section 6511(b)(2)(A) limits the amount of the recovery:

If the claim was filed by the taxpayer during the 3-year period prescribed in subsection (a), the amount of the credit or refund shall not exceed the portion of the tax paid within the period, immediately preceding the filing of the claim, equal to 3 years plus the period of any extension of time for filing the return. 

If you filed your tax return for 2018 (without an extension) late on June 10, 2019, a refund claim will be timely if filed by June 10, 2022.  A refund claim timely filed on June 10, 2022, can only recover amounts paid by June 10, 2019: three years preceding the date the refund claim was filed and without adjustment because there was no extension of time to file.  For many taxpayers, most if not all payments (withholding, estimated taxes, or payment with return or extension request) will have been made on or before April 15, 2019, and are deemed to be paid on that date.  Thus, the taxpayer has very limited if any recovery on that timely filed refund claim.

Ah, but for 2019 tax returns, we had until July 15, 2020, to file returns, as a result of a determination by the Secretary of the Treasury pursuant to section 7508A.  If we filed our return on July 15, 2020, it was timely because of section 7508A.  If we later file a refund claim on July 15, 2023, the refund claim would satisfy the first limitations requirement, in section 6511(a).  Thus, both the return and the refund claim were filed timely.  Oops!  The “lookback” period is “3 years plus the period of any extension of time for filing the return.”  Section 7508A doesn’t extend the deadline for filing returns.  It suspends or postpones it.  And it doesn’t change the fact that most payments were deemed paid on April 15, 2020.  A suspension is not an extension.  So the lookback period only goes back to July 15, 2020, but payments of withholding or estimated taxes were deemed paid on April 15, 2020.  Result – limited or no recovery after a timely-filed return and a timely-filed refund claim.  Of course, that’s probably not what Congress had in mind – maybe Congress didn’t consider it at all – but Chief Counsel Advise 2020-53013 concluded that’s exactly what would happen.  

Thus, the Taxpayer Advocate Service recommended that Congress amend section 6511(b)(2)(A) to increase the lookback period by the period of any postponement of the filing deadline under section 7508A.  The legislative recommendation makes perfect sense and I whole-heartedly agree with it.  Unfortunately, that leaves us dependent on Congress.  Even if the proposed fix is enacted, it may take a while.  In the meantime, taxpayers may be losing legitimate refund claims because they didn’t understand the Service’s interpretation of the rules.  The deadline for refund claims associated with 2019 tax returns is still more than a year away, but some taxpayers received section 7508A relief for their 2018 tax returns and the deadline for refund claims for those returns is only three months away.

Non-legislative fix?

While we wait to see if Congress will enact the NTA proposal, is there anything that the IRS could do in the meantime to solve the problem?  I think perhaps there is, although TAS may have already discussed non-legislative fixes with the IRS and been rebuffed.  And we still want the statutory fix as much more certain.

We’ve mostly focused on declarations under section 7508A as postponing filing and payment deadlines.  The actual language of Section 7508A(a) states that the Secretary “may specify a period of up to 1 year that may be disregarded in determining” three things:

(1) whether any of the acts described in paragraph (1) of section 7508(a) were performed within the time prescribed therefor (determined without regard to extension under any other provision of this subtitle for periods after the date (determined by the Secretary) of such disaster or action),

(2) the amount of any interest, penalty, additional amount, or addition to the tax for periods after such date, and

(3) the amount of any credit or refund.

The first two are fairly obvious, but how does disregarding a period of time change the determination of the amount of a credit or refund, instead of just whether the refund claim was timely??  The only thing I can think of offhand – other than overpayment interest, for which that period specified by Treasury is explicitly not disregarded – is the lookback limitation for refund claims.

The regulations include an example where section 7508A relief was granted to disregard a period including the refund claim deadline.  See § 301.7508A-1(f), Example 5.  A timely refund claim for 2008 would normally have to be filed no later than April 16, 2012.  Due to an earthquake, the IRS determined that deadlines from April 2, 2012, through October 2, 2012, were postponed to October 2, 2012.  That included the section 6511(a) deadline for filing a refund claim.  The example concluded that the lookback provision was effectively changed by section 7508A(a)(3).  The specified period was disregarded for purposes of the lookback provision.

Moreover, in applying the lookback period in section 6511(b)(2)(A), which limits the amount of the allowable refund, the period from October 2, 2012, back to April 2, 2012, is disregarded under paragraph (b)(1)(iii) of this section [which duplicates the statutory language].

Moreover, in applying the lookback period in section 6511(b)(2)(A), which limits the amount of the allowable refund, the period from October 2, 2012, back to April 2, 2012, is disregarded under paragraph (b)(1)(iii) of this section [which duplicates the statutory language].

It’s notable that the regulation just states that the specified period is disregarded, rather than any distinction between “suspension” or “extension” that the CCA relied on.  Although they were not dealing with the same fact pattern, the regulation and the CCA seem fundamentally at odds.  (There’s no discussion of the regulation in the CCA, so perhaps the author didn’t check it.  That’s easy to understand; email advice by its very nature cannot require the same depth of careful analysis and review.)  Before concluding that we have a regulation that we can rely on, though, there are a few questions to address.

First, does the suspension of the lookback period determined in the regulation depend on it being explicitly stated by the IRS in its determination under section 7508A, or is it an automatic result of the determination of that specified period? The example doesn’t mention an explicit statement in the determination; it only references the regulation language that duplicates the statutory language.  There was no mention of the lookback period in Notice 2020-23, which perhaps suggests that the IRS normally doesn’t make such an explicit statement about the lookback period.  That in turn perhaps suggests that the IRS considers the result as automatic and need not be stated in the determination.  It’s not entirely clear, but before having researched it further I think the better answer is that it’s automatic.

Second, does the result in the regulation only apply if a disregarded period includes the deadline for the refund claim (fact pattern in the regulation) or also if a disregarded period includes the deadline for filing the original return (fact pattern in the CCA)?  The CCA didn’t try to distinguish the regulation, but perhaps it could/would have.  

The rationale for a longer lookback period in the former situation is that, absent the disaster, the taxpayer could have filed the refund claim within three years of timely filing the return and satisfied the lookback rule.  The rationale for a longer lookback period in the latter situation presumably would be different.  A disaster in the year that the return was filed wouldn’t make it more difficult for the taxpayer to file the refund claim three years later.  I think the rationale rests on the disadvantage to taxpayers who are familiar with the basic 3-year statute of limitations for refund claims (often widely publicized by the IRS and tax practitioners each year) but unaware of the lookback rule.

So, there’s some uncertainty.  I would certainly be willing to argue in court for the result proposed by the NTA, even without a fix.  The regulation ties the language of section 7508A(a)(3) to the lookback limitation for refunds.  The “amount of any credit or refund” in the statute is not explicitly limited to a refund claim filed during that disregarded period.  Section 6511(b)(2)(A) is structured so that the taxpayer’s refund is not limited if she files her return timely and files the refund claim timely.  Why should that principle be invalidated because the taxpayer was in a disaster area when the return was filed?    

But I would feel more comfortable with at least a regulatory fix, while we’re waiting for a legislative fix.  The IRS could amend the regulation to provide an example reaching the result described by the NTA, and perhaps state explicitly the effect on the lookback rule in any determinations pursuant to section 7508A.  Perhaps the IRS could reconsider that CCA from 2020.  

In determining the language for the legislative and/or regulatory fix, Congress and/or the IRS will also have to answer a third question.  For the 2019 tax year, for which the return is due in 2020 and a refund claim would have to be filed in 2023, which determinations by the IRS disregarding a period pursuant to section 7508A will have that same effect on the lookback period?  A determination with respect to a disaster in 2023 that includes the deadline for filing a refund claim?  Yes, per the existing regulation.  A determination with respect to a disaster in 2020 that includes the deadline for filing the return?  Yes, per the NTA’s recommendation.  What about disasters in 2021 and 2022?  Draft carefully if you want to exclude those.

Comments

  1. I have several comments, Bob:

    First, that the author of the CCA did not discuss the regulation, to me, indicates ignorance of the regulation example. Thus, the CCA is wrong.

    Second, the example in the 7508A reg. that extends the 6511(b)(2)(A) period to make the amount limitation unlimited is clearly an extrapolation from a similar example under the 7502 regs. Here’s the example from Reg. 301.7502-1(f)(3):

    (i) Taxpayer A, an individual, mailed his 2001 Form 1040, “U.S. Individual Income Tax Return,” on April 15, 2005, claiming a refund of amounts paid through withholding during 2001. The date of the postmark on the envelope containing the return and claim for refund is April 15, 2005. The return and claim for refund are received by the Internal Revenue Service (IRS) on April 18, 2005. Amounts withheld in 2001 exceeded A’s tax liability for 2001 and are treated as paid on April 15, 2002, pursuant to section 6513.

    (ii) Even though the date of the postmark on the envelope is after the due date of the return, the claim for refund and the late filed return are treated as filed on the postmark date for purposes of this paragraph (f). Accordingly, the return will be treated as filed on April 15, 2005. In addition, the claim for refund will be treated as timely filed on April 15, 2005. Further, the entire amount of the refund attributable to withholding is allowable as a refund under section 6511(b)(2)(A).

    You may ask, “What is the authority for that extension of the lookback period?” The preamble to the 7502 regs. points to the Second Circuit’s opinion in Weisbart, which is factually on all fours, where the court said the 6511(b)(2)(A) limitation did not apply when 7502 was used to make a late-arriving refund claim timely under 6511(a). For a discussion of the 7502 reg., Weisbart, and this situation, see my two posts on the Harrison case from Jan. 15 and 31, 2020. In Harrison, the DOJ attorney did not cite that reg. or Weisbart and so convinced the district court initially that 6511(b)(2)(A) limited the refund claim to zero. After I alerted the taxpayer’s lawyer to the relevant authority and he moved for reconsideration, the DOJ submitted a paper conceding error — that 6511(b)(2)(A) did not limit the refund claim amount at all. The Harrison court then reversed its ruling and excoriated the DOJ lawyers for not citing the regs. or Weisbart. The judge was so angry that he ordered every lawyer at the IRS and DOJ Tax Division to be shown the Harrison opinion, so this never happened again. I wonder if this was ever done. It seems strange that the drafter of the CCA on 7508A des not seem to know about the 7502 and 7508A reg. examples, if he or she was forced to read Harrison.

    Third, if one were ever to get a case under the 7508A example, I would bring it in the Court of Federal Claims. Why? Because the Fed. Cir. has held that the lookback amount limitations are not jurisdictional. See Stephen’s post on the Fed. Cir. Boeri case from Aug. 16, 2014. Had section 6511(b)(2)(A) limitations been jurisdictional (as some other Circuits may have held), the Supreme Court’s 2013 opinion in Sebelius v. Auburn Regional Med. Center indicates that no regulation could change the legal result of the statute. Recent Supreme Court case law says that all nonjurisdictional claim processing rules are subject to waiver or forfeiture by the defendant (which would be the IRS or DOJ attorneys in a refund suit). I would bet that, if pointed to the reg. under 7508A, the DOJ attorneys in the case would waive making any argument under 6511(b)(2)(A), and the CFC couldn’t itself invalidate the reg. BUT SEE THE RECENT FED. CIR. OPINION IN BROWN ON WHICH KEITH WILL SOON BE BLOGGING, WHERE THE COURT HELD THAT THE SIGNATURE REQUIREMENT FOR REFUND CLAIMS WAS NOT JURISDICTIONAL, BUT STILL COULD NOT BE SUBJECT TO WAIVER — A RESULT THAT I THINK VIOLATES RECENT SUPREME COURT CASE LAW.

  2. Bob Probasco says

    Thanks, Carl. Great information!

    I think the CCA is clearly wrong as to its *reasoning* for the result. The distinction between a suspension and an extension just does not hold water under the 7508A regulation. (It’s rather surprising that T.D. 8911, issued about six months after Weisbart, doesn’t mention it when describing the “clarification” regarding the effect on the lookback period.)

    I’m not sure the IRS has thought about the situation in the Purple Book, which differs slightly from the regulation and from Weisbart. I assumed that TAS would have discussed the problem with the IRS and sought a non-legislative fix as an interim measure, before issuing the Purple Book . That would make sense to me, but I never worked for the IRS (as many who write or read here did) let alone TAS, so I don’t really understand the process for something like this. So, maybe the IRS hadn’t thought about it (other than in email advice). Or maybe TAS raised the issue and the IRS disagreed with the legislative recommendation. I don’t know.

    I disagree with the *result* in the CCA as well as the *reasoning*, but it’s not clear to me that the IRS (institutionally speaking) would reach the same conclusion. There’s a sliver of ambiguity because the original return and the refund claim in the CCA and the Purple Book proposal were separate documents, rather than the same document as in Weisbart. And the CCA/Purple Book involved a 7508A suspension that affected the timeliness of the original return rather than the timeliness of the refund claim. I don’t think those distinctions are enough to support the result in the CCA, but the IRS might.

    Great to hear about another area where the courts – well, at least the Federal Circuit – are actually following the Supreme Court case law!

    • Carl Smith says

      For those not too familiar with this area, Bob makes an interesting point about timing that I missed. The section 7508 reg., with its example essentially disregarding 6511(b)(2)(A)’s lookback rule for the relevant period, appeared in T.D. 8911 (adopted on Feb. 16, 2001, after Weisbart was decided on July 28, 2000). But, T.D. 8911 doesn’t mention Weisbart. There may possibly be a good reason for that, since the Weisbart court cites regs. under 6402 and 7502 that effectively say that the return received by the IRS after the required date is, under section 7502, deemed filed on the postmark date. Weisbart involved a late original return claiming a refund that was postmarked exactly 3 years after the return’s due date, but received by the IRS a few days later. If the return is deemed filed on the postmark date, the 3-year lookback rule runs backward from that date. The logic for the the ruling under 7502, thus, may not be the same as the logic for the rule under 7508. The ruling under section 7508 s how to apply a “disregarded” period.

      In any event, the proposed reg. under 7508, which contains the example 5 Bob notes, was issued before Weisbart, on Dec. 30, 1999 (by REG-101492-98). But, as originally drafted, example 5 did not discuss how section 6511(b)(2)(A) worked.

      Example 5 of the final 7508 reg. was modified in the final T.D. That example does discuss section 6511(b)(2)(A). Here’s from the preamble of the final T.D. 8911 explaining the change:

      The regulations clarifies the application of section 7508A to the lookback period in section 6511(b)(2)(A). This period limits the amount that may be refunded to the taxpayer when a timely claim is filed under section 6511(a). In Example 5, H and W timely file their
      2001 income tax return on April 15, 2002. Example 5 states that an amended return for 2001 will be timely if it is filed on or before July 14, 2005. As clarified by the final regulations, Example 5 further states that the section 6511(b)(2)(A) lookback period runs
      from July 14, 2005, back to April 15, 2002. Thus, the taxpayers are allowed a refund of estimated tax and tax withheld from wages for 2001, deemed paid on April 15, 2002, under section 6513(b).

      The section 7502 reg. that I mentioned that contained the example cited in my first comment actually was revised on Jan. 11, 2001 (by T.D. 8932), just over a month before the section 7508 reg. was adopted in final. The example in the 7502 reg. was not included in the proposed revision to the 7502 reg., when it was first proposed on Jan. 15, 1999 (by REG-101492-98) — about 11 months before the 7508 reg. was proposed. So, neither proposed reg (both issued before Weisbart) discussed section 6511(b)(2)(A), and the final regs. were issued pretty much at the same time in 2001, after Weisbart. I have got to believe that the Treasury Department reviewers and the IRS reviewers were aware of both proposed regs. and Weisbart before the final regs. were issued, both of which were modified to contain examples of how section 6511(b)(2)(A) worked., even though the only reference to Weisbart is in the preamble to the final regs. under section 7502. That preamble reads, in part:

      In the notice of proposed rulemaking, the IRS and the Treasury Department requested comments regarding whether section 7502 should apply to claims for credit or refund made on late filed original income tax returns. No comments were received on this issue. However, the IRS and the Treasury Department have determined that, in certain situations, a claim for credit or refund made on a late filed original income tax return should be treated under section 7502 as timely filed on the postmark date for purposes of section 6511(b)(2)(A). This is consistent with the opinion of the United States Court of Appeals for the Second Circuit in Weisbart v. United States Department of Treasury and Internal Revenue Service, 222 F.3d 93 (2d Cir. 2000), rev’g 99-1 USTC (CCH) ¶ 50,549 (E.D.N.Y. 1999), AOD-CC-2000-09 (Nov. 13, 2000).

      Although, above, I state that I can see the logic in distinguishing the possible results under 7502 and 7508, it is clear to me that the Weisbart opinion raised the consciousness of the IRS reg. reviewers about how section 6511(b)(2)(A)’s lookback period should apply and caused the final regs. under both to contain a taxpayer-favorable example under that Code section.

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